Why were the media hypnotised by Sam Bankman-Fried?

John Naughton in The Guardian

So Sam Bankman-Fried (henceforth SBF) was eventually arrested at his multimillion-dollar residence in the Bahamas, a tax haven with nice beaches attached. The only mystery about this was the unconscionable length of time that it took the Bahamian authorities to measure him for handcuffs. The police said that he was arrested at the request of US legal authorities for “financial offences” under US and Bahamian laws connected with the FTX cryptocurrency exchange that he co-founded in 2019 and Alameda Research, a hedge fund that he set up in 2017. On Tuesday, a local court denied him bail, which suggests that an extradition request from the US will be granted and he will soon be appearing in a New York courtroom.

The grisly details of what SBF is alleged to be guilty of will emerge in forthcoming criminal proceedings. But already expectations are high: Amazon has announced that it is working on a series about the scandal in partnership with the Russo brothers, the makers of Marvel movies.

For the moment, though, a brief outline will have to do. FTX was a cryptocurrency exchange that provided an easy way for people to buy and sell these virtual currencies. Many people had invested billions of “real” money in it to facilitate their participation in the crypto casino. But in early November, rumours of problems with FTX surfaced after Binance, another crypto exchange, dramatically refused to bail it out, citing “corporate due diligence” and reports of “mishandled customer funds”.

There then followed, as the night the day, a run on FTX, as panicking investors tried to withdraw their money, which in turn led to its insolvency and a filing for bankruptcy. The big puzzle, though, was why couldn’t FTX have just given its investors their money back? The answer appears to be that it wasn’t there; in some way, SBF’s hedge fund had been treating FTX as its piggy bank, possibly even playing the hedge fund market with investors’ money.
The thought SBF might be as manipulative as any oil mogul or tobacco executive never occurred to the poor dears

Once it was clear that this particular game was up, SBF then embarked on an astonishing apology tour on every media outlet he could find. In almost every interview he was touchingly apologetic while at the same time maintaining that he had no knowledge of potentially fraudulent activities at his own company, including using billions of dollars of customers’ deposits as collateral for loans for other purposes. He had, he explained ruefully, been out of his depth. On some occasions, he also seemed to be trying to deflect blame on to Caroline Ellison, the former CEO of his other company, Alameda Research.

The biggest question prompted by this apology tour is: why did so many apparently serious media outfits let him get away with it? The interview questions were often softball ones, occasionally toe-curlingly so. Some interviewers confessed apologetically that they knew nothing about the complex businesses he had run and allowed themselves to be bemused by the incomprehensible bullshit he was emitting. Often, they seemed hypnotised, as many otherwise sensible people had been before the crash, by this tech wunderkind with big hair and baggy shorts who had, until recently, been promising to give away his phenomenal wealth to good causes, while in fact he had seemingly been presiding over the vaporisation of billions of dollars of other people’s savings.

But this embarrassing failure of mainstream media was really just the encore to an even bigger failure – their wilful blindness to what had been going on while SBF was in his prime. It turned out that earlier in the year the Securities and Exchange Commission (SEC) had written to FTX seeking to determine if the company was as flaky as some observers (mainly on the web) had suspected. As Cory Doctorow pointed out, the SEC never got an answer, because eight US lawmakers – four Republicans and four Democrats – wrote a letter to the SEC chairman demanding that he back off. And five of these eight, according to Doctorow, had received substantial case donations from SBF, his employees, affiliated businesses or political action committees.

There was a real story here, in other words, long before FTX imploded. But it wasn’t told because the mainstream media were so invested in the founder-worship that is the curse of the tech industry, not to mention some of those who cover it. The thought that “the poster child for the libertarian ethos that crypto profits accrued to those most capable”, as one commentator described SBF, might be as politically manipulative as any oil mogul or tobacco executive never occurred to the poor dears. Sometimes, societies get the mainstream media they deserve.

The collapse of FTX, Sam Bankman-Fried’s crypto con, how it soared & why it vaporized

 

Bitcoin: It’s always difficult to get people to understand something if their wealth depends on their not understanding it.

The rising price of electricity and the plunging value of the cryptocurrency could burst the speculative bubble for today’s prospectors writes John Naughton in The Guardian

Bitcoin mining has previously produced lucrative gross margins as high as 90%. Photograph: Jack Guez/AFP/Getty Images 
In the bad old days, prospecting for gold was a grisly business involving hysterical crowds, pickaxes, digging, the wearing of appalling hats, standing in rivers panning for nuggets, “staking” claims and so on. The California gold rush of 1848-55, for example, brought 300,000 hopefuls to the Sierra Nevada and northern California and involved the massacre of thousands of Indigenous people.

In our day, the new gold is bitcoin, a cryptocurrency, and prospecting for it has become a genteel armchair activity, although it is called “mining”, for old times’ sake. What it actually involves is using computers to perform unfathomably complicated calculations to create cryptographic “hashes” – codes that are, in practical terms, uncrackable.

Sounds intimidating, doesn’t it? But in reality anyone can play the game. You just have to have the right kit – a special bitcoin-mining computer called an Asic (application-specific integrated circuit). These gizmos are readily available online. I’m looking at one as I write: the Bitmain Antminer S19, which costs $6,999 (£5,600) and can do 95 terahashes – 95tn calculations – every second.

Mining is a misleading term for the computational work that’s needed to validate transactions on the blockchain – the cryptographically protected distributed ledger that underpins bitcoin. For every “block” that a miner is able to validate, they are rewarded with a number (currently 6.3) of new bitcoins. The value of the reward is tied to the prevailing price of the currency at the time. Not so long ago, for example, when each bitcoin stood at $68,000, that reward was worth nearly $430,000.

So you can understand why bitcoin mining looks a bit like a contemporary version of what happened in California in the 1840s. While most of the hopeful arrivals then were Americans, there were also thousands from Latin America, Europe, Australia and China. The Judge Business School in Cambridge, which has been tracking bitcoin mining for years, now finds that the US, with 37.84% of global hashrates, remains the biggest location, followed by China (21.11%), Kazakhstan (13.22%), Canada (6.48%) and Russia (4.66%).

So bitcoin mining has become a global phenomenon. And while here and there there are small outfits diversifying into it, such as the Californian pancake-batter maker that bought an Asic after pancake sales plunged during the pandemic, most miners are now industrial-scale operations with large sheds of Asics in serried racks, looking for all the world like small-scale data centres of the kind run by Google and co.

And, like data centres, they are power-hungry. That Bitmain Antminer machine, for example, has a power rating of 3,250 watts. It was recently estimated that bitcoin consumes about 110 terawatt hours per year, which is 0.55% of global electricity production, or roughly equivalent to the annual energy draw of countries such Malaysia or Sweden. 

For many operators, bitcoin mining has up to now been an astonishingly lucrative activity, with gross margins sometimes as high as 90%. But suddenly things have changed. First, bitcoin’s price has plunged – from its peak of $68,000 to $30,587 as I write this. And second, electricity prices have soared – by up to 70% in parts of the world, leading some industry experts to calculate that mining a single bitcoin can now cost up to $25,000. So the industry finds itself squeezed at both ends. Just like any ordinary business, in other words.

There’s an agreeable sense of schadenfreude in all this. Bitcoin has been a fascinating phenomenon from the very beginning, but one that morphed under the pressure of greed. Originally conceived as a currency – that is, as a means of payment – it rapidly became perceived as an asset class and, in a time of low interest rates, was the subject of an hysterical speculative bubble that now seems to have deflated, even if it hasn’t definitively burst.

Although it was predictable from the outset that, as the currency evolved, maintenance of its underpinning cryptographic blockchain would become ever-more onerous, it took a long time for the environmental consequences of that fact to be realised. But perhaps that’s a hallmark of every speculative bubble. It’s always difficult to get people to understand something if their wealth – real or anticipated – depends on their not understanding it. Meanwhile, the rest of us are left with the realisation that even the coolest idea can fry the planet.

Warren Buffett: "Cryptocurrencies will have a bad ending"

 

Will blockchain fulfil its democratic promise or will it become a tool of big tech?

Engineers are focused on reducing its carbon footprint, ignoring the governance issues raised by the technology writes John Naughton in The Guardian

Illuminated rigs at the Minto cryptocurrency mining centre in Nadvoitsy, Russia. Photograph: Andrey Rudakov/Getty Images



When the cryptocurrency bitcoin first made its appearance in 2009, an interesting divergence of opinions about it rapidly emerged. Journalists tended to regard it as some kind of incomprehensible money-laundering scam, while computer scientists, who were largely agnostic about bitcoin’s prospects, nevertheless thought that the distributed-ledger technology (the so-called blockchain) that underpinned the currency was a Big Idea that could have far-reaching consequences.

In this conviction they were joined by legions of techno-libertarians who viewed the technology as a way of enabling economic life without the oppressive oversight of central banks and other regulatory institutions. Blockchain technology had the potential to change the way we buy and sell, interact with government and verify the authenticity of everything from property titles to organic vegetables. It combined, burbled that well-known revolutionary body Goldman Sachs, “the openness of the internet with the security of cryptography to give everyone a faster, safer way to verify key information and establish trust”. Verily, cryptography would set us free.

At its core, a blockchain is just a ledger – a record of time-stamped transactions. These transactions can be any movement of money, goods or secure data – a purchase at a store, for example, the title to a piece of property, the assignment of an NHS number or a vaccination status, you name it. In the offline world, transactions are verified by some central third party – a government agency, a bank or Visa, say. But a blockchain is a distributed (ie, decentralised) ledger where verification (and therefore trustworthiness) comes not from a central authority but from a consensus of many users of the blockchain that a particular transaction is valid. Verified transactions are gathered into “blocks”, which are then “chained” together using heavy-duty cryptography so that, in principle, any attempt retrospectively to alter the details of a transaction would be visible. And oppressive, rent-seeking authorities such as Visa and Mastercard (or, for that matter, Stripe) are nowhere in the chain.
 
Given all that, it’s easy to see why the blockchain idea evokes utopian hopes: at last, technology is sticking it to the Man. In that sense, the excitement surrounding it reminds me of the early days of the internet, when we really believed that our contemporaries had invented a technology that was democratising and liberating and beyond the reach of established power structures. And indeed the network had – and still possesses – those desirable affordances. But we’re not using them to achieve their great potential. Instead, we’ve got YouTube and Netflix. What we underestimated, in our naivety, were the power of sovereign states, the ruthlessness and capacity of corporations and the passivity of consumers, a combination of which eventually led to corporate capture of the internet and the centralisation of digital power in the hands of a few giant corporations and national governments. In other words, the same entrapment as happened to the breakthrough communications technologies – telephone, broadcast radio and TV, and movies – in the 20th century, memorably chronicled by Tim Wu in his book The Master Switch.

Will this happen to blockchain technology? Hopefully not, but the enthusiastic endorsement of it by outfits such as Goldman Sachs is not exactly reassuring. The problem with digital technology is that, for engineers, it is both intrinsically fascinating and seductively challenging, which means that they acquire a kind of tunnel vision: they are so focused on finding solutions to the technical problems that they are blinded to the wider context. At the moment, for example, the consensus-establishing processes for verifying blockchain transactions requires intensive computation, with a correspondingly heavy carbon footprint. Reducing that poses intriguing technical challenges, but focusing on them means that the engineering community isn’t thinking about the governance issues raised by the technology. There may not be any central authority in a blockchain but, as Vili Lehdonvirta pointed out years ago, there are rules for what constitutes a consensus and, therefore, a question about who exactly sets those rules. The engineers? The owners of the biggest supercomputers on the chain? Goldman Sachs? These are ultimately political questions, not technical ones.

Blockchain engineers also don’t seem to be much interested in the needs of the humans who might ultimately be users of the technology. That, at any rate, is the conclusion that cryptographer Moxie Marlinspike came to in a fascinating examination of the technology. “When people talk about blockchains,” he writes, “they talk about distributed trust, leaderless consensus and all the mechanics of how that works, but often gloss over the reality that clients ultimately can’t participate in those mechanics. All the network diagrams are of servers, the trust model is between servers, everything is about servers. Blockchains are designed to be a network of peers, but not designed such that it’s really possible for your mobile device or your browser to be one of those peers.”

And we’re nowhere near that point yet.

Hawala explained

By Shahid Mehmood in The Friday Times

Hawala and Hundi are two of the most familiar terms in Pakistan’s economic landscape. Put simply, these are synonymous with informal channels through which money flows in or out of the country. It has been on the policymakers’ radar for a long time but there has not been any significant success in terms of curbing its workings. These days, there is a new urgency to tackle it as Pakistan finds itself on the Financial Action Task Force’s (FATF) Grey List.

It is a good time to peek into the nature, history and workings of this system in order to understand its continued sway and why it became popular in the first place. Hawala basically denotes a system made up of money lenders and businessmen around the globe. What distinguishes it from the formal exchange channels (like banking) is that it works largely on repute and trust rather than formal contracts. It comes with its advantages, anonymity being the primary one. The other primary advantage comes in the form of avoiding expensive formal channels of finance and exchange. Anonymity, however, comes with a heavy price tag for countries like Pakistan as this particular characteristic has been mercilessly exploited by smugglers, drug peddlers and terrorism financiers. No wonder Pakistan finds itself on the FATF radar.

Transfer of financial resources using a Hawala type system, based on trust, is a very old practice. Robert Sobel, in his magisterial The Pursuit of Wealth, has traced the system back to the dawn of commerce and trade (he does not explicitly mention Hawala, though). Babylonian and Sumerian merchants, for example, relied heavily on people of reputation (including priests) for acting as clearing houses and money transfer intermediaries/channels providing a valuable service to citizens. Instead of taking the substantial risk of carrying money and valuables themselves, they were deposited with these individuals who in return would give them an acknowledgment receipt (with their particular stamp or insignia). When merchants would reach their destination, they would redeem the amount by presenting the receipt to the Hawala dealers of that particular place. Thus, a transaction was settled with minimum of fee and administrative requirements. Moreover, the existence of such a valuable service oiled the wheels of commerce as it took away the many risks that merchants faced while carrying money themselves.

If looked at in modern parlance, Hawala is a decentralised system based on competition. There is little requirement for meeting statutory obligations and cumbersome procedures that exist under a modern, centralised banking system. Historically, money lenders under Hawala have charged just a fraction of what formal transfer channels charge from consumers. A question may arise as to the profitability of such a service when the charged fees are low. But that aspect has, historically, been taken care of by realising economies of scale: lower charges on transfers have attracted enough customers to ensure a healthy return.

Since the dawn of commerce and trade, this system has persisted despite challenges. It was quite common in the Middle Ages, as has been documented extensively by the economist Avner Grief’s research. For example, 8th century China under the Tang dynasty had a similar system called fei-ch’ien (flying money). The need for such a system arose due to the dangers encountered in physically transferring tax money and valuables to the empire’s capital. The operation of that particular system ameliorated that risk to a large extent. Formidable challenges to this informal, decentralised authority rose with the rise of nation states, powerful central governments and central banking authority. Yet, the system refuses to vanish.

What, then, are we to make of global efforts to clamp down and curb Hawala type transactions? Specifically, one has to look at the social and economic benefits of doing away with such a system. In hindsight, this may seem odd since the official version foisted upon our imaginations is one of a system that causes substantial damage to the economy. This version stands vindicated if we were to limit the system’s workings to facilitating money borne out of drug peddling, terrorism financing and other such harmful activities.

But one has to be careful in limiting their imagination to only these activities. The fact of the matter is that a Hawala like system offers many socially beneficial incentives that tend to get lost in the fog of official versions. It tends to discount the benefits accrued to consumers. I have already narrated its extremely beneficial role in facilitating trade and commerce in the earliest known civilizations. Aside from this facilitation, there are other advantages that such a system confers upon the society. Specifically, its presence ensures lower transaction costs to its subscribers.
Banks illustrate this point. They charge various types of fees from customers under the garb of different heads and make a healthy profit based on the deposits of customers. On net, the benefits accrued to customers are either cancelled or are inferior to what they are charged for the service. But when these kinds of institutions fail (largely based on their actions), they are usually bailed out using taxpayer money (the ‘too big to fail’ phenomenon). If you think about it, it is akin to a heist! And the only remedy available against such excesses are courts, which again exact a heavy cost from society due to the time, duration and financials involved. In a country like Pakistan, given the state of affairs of courts, it is advisable to stay away from them and save time plus money.

Consumers are usually saved that predicament in an informal, decentralised system like Hawala. Once a reputation of operator is tarred, its curtains for that business and no amount of running around can recoup the lost repute. More importantly, there is little possibility of ‘too big to fail’ phenomenon, to be bailed out using taxpayer money. Thus society not only benefits in terms of saving money (very low transaction fees), but also in terms of a decentralised system that weeds out inefficient, unproductive and corrupt operators without the need for a central authority or courts.

The lesson from all of this discussion, at least for policymakers, is that efforts to curb hawala type system needs an understanding of the nature and forces that propel it. If informal systems of financial transactions have endured for centuries, there are good reasons for that, some of them outlined above. A society and its inhabitants have the capacity to compare transaction costs of having a formal system against an informal system. If the former confers a lower cost, the latter would disappear without the need for state intervention (and vice versa). If this point can be grasped, then it is clear that Pakistan’s policymakers should first review the predatory nature of its functioning (specifically its taxation) plus that of its financial system, and what cost it inflicts upon the society. It also does not help that the government strongly incentivised use of such channels when it was in its interest (to finance Afghan Jihadi groups, for example), helped entrench it, and now wants to get rid of it when faced with external pressure.

Historical evidence, though, suggests that such administrative exercises are usually futile in the end since an alternative tends to rise. The rise of crypto-currencies, like Bitcoin, is an apt reflection of this fact. At its core, crypto currencies reflect the working of a decentralised exchange with meagre transaction costs, just like Hawala. How would the world curb this system? Ban computers? I don’t think so.